SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JANUARY 31, 1996 COMMISSION FILE NO. 0-13804
THE CHICAGO DOCK AND CANAL TRUST
--------------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 36-2476640
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
455 EAST ILLINOIS STREET, SUITE 565
- -----------------------------------
CHICAGO, ILLINOIS 60611
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(Address of principal executive offices) (zip code)
(312) 467-1870
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON SHARES OF BENEFICIAL INTEREST - NO PAR VALUE PER SHARE, 5,783,800 SHARES
OUTSTANDING ON MARCH 14, 1996.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
JANUARY 31, APRIL 30,
1996 1995
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(IN THOUSANDS)
INVESTMENT IN REAL ESTATE, at cost:
DEVELOPED PROPERTIES $70,459 $70,487
LAND AND LAND IMPROVEMENTS
HELD FOR DEVELOPMENT 17,130 16,916
LAND SUBJECT TO HOTEL
GROUND LEASE 6,549 6,549
LESS:ACCUMULATED
DEPRECIATION AND AMORTIZATION (13,684) (11,638)
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NET INVESTMENT IN REAL ESTATE 80,454 82,314
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OTHER ASSETS:
CASH AND CASH EQUIVALENTS 793 344
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INVESTMENTS AVAILABLE FOR SALE, AT COST
(APPROXIMATE MARKET VALUE OF $5,020
AT JANUARY 31, 1996) 4,933 3,725
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SHORT TERM INVESTMENTS-RESTRICTED,
(APPROXIMATE MARKET VALUE OF $391
AT JANUARY 31, 1996) 391 130
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SECURITY DEPOSIT CASH 1,277 1,330
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RECEIVABLES:
TENANTS (INCLUDING $28,408 OF ACCRUED
BUT UNBILLED RENTS AT JANUARY 31, 1996) 28,953 26,193
REAL ESTATE TAXES PAYABLE BY LESSEES 7,006 5,828
LAND IMPROVEMENTS 1,388 1,388
INTEREST 62 91
OTHER 222 506
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37,631 34,006
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OTHER ASSETS, NET 1,243 1,427
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$126,722 $123,276
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THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
JANUARY 31, APRIL 30,
1996 1995
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(IN THOUSANDS)
LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
REAL ESTATE TAXES $5,558 $4,882
REAL ESTATE TAXES PAYABLE BY LESSEES 7,006 5,828
ACCRUED ENVIRONMENTAL REMEDIATION COSTS 750 750
OTHER 1,699 1,492
CASH DIVIDENDS PAYABLE 58 58
MORTGAGE NOTES PAYABLE 28,049 27,369
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TOTAL LIABILITIES 43,120 40,379
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SHAREHOLDERS' EQUITY:
COMMON SHARES OF BENEFICIAL INTEREST:
NO PAR VALUE, 20,000,000 AUTHORIZED,
5,944,200 ISSUED 3,101 3,101
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PREFERRED SHARES OF BENEFICIAL INTEREST:
NO PAR VALUE, 1,000,000 AUTHORIZED,
NONE ISSUED 0 0
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UNDISTRIBUTED INCOME BEFORE NET GAIN FROM
THE SALE OF REAL ESTATE PROPERTIES 8,575 7,870
UNDISTRIBUTED NET GAIN FROM THE SALE
OF REAL ESTATE PROPERTIES 72,545 72,545
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TOTAL UNDISTRIBUTED NET INCOME 81,120 80,415
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LESS:
TREASURY SHARES OF BENEFICIAL INTEREST,
AT COST-160,400 SHARES (619) (619)
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TOTAL SHAREHOLDERS' EQUITY 83,602 82,897
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$126,722 $123,276
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THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE BALANCE SHEETS.
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
------------ ------------ ------------- ------------
1996 1995 1996 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
REVENUES:
REVENUE FROM RENTAL PROPERTY $4,009 $3,894 $11,448 $11,895
REAL ESTATE TAXES PAYABLE BY LESSEES 1,460 1,659 4,784 5,205
------------ ------------ ------------- ------------
TOTAL REVENUES 5,469 5,553 16,232 17,100
------------ ------------ ------------- ------------
EXPENSES:
REAL ESTATE TAXES 733 761 2,205 2,354
REAL ESTATE TAXES PAYABLE BY LESSEES 1,460 1,659 4,784 5,205
PROPERTY OPERATING EXPENSES 779 703 2,344 2,516
GENERAL AND ADMINISTRATIVE 575 520 1,587 1,370
DEPRECIATION AND AMORTIZATION 759 863 2,265 2,740
INTEREST EXPENSE 723 1,015 2,158 2,988
------------ ------------ ------------- ------------
TOTAL EXPENSES 5,029 5,521 15,343 17,173
------------ ------------ ------------- ------------
OPERATING INCOME (LOSS) 440 32 889 (73)
INVESTMENT AND OTHER INCOME 74 101 246 265
EQUITY IN NET LOSS OF LCD PARTNERSHIP (59) (119) (256) (372)
NET LOSS FROM DISPOSITION OF REAL ESTATE 0 (1,729) 0 (1,729)
------------ ------------ ------------- ------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 455 (1,715) 879 (1,909)
EXTRAORDINARY ITEM:
GAIN FROM EXTINGUISHMENT OF DEBT 0 2,067 0 2,067
------------ ------------ ------------- ------------
NET INCOME $455 $352 $879 $158
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
EARNINGS PER SHARE $0.08 $0.06 $0.15 $0.03
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE STATEMENTS.
THE CHICAGO DOCK AND CANAL TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS NINE MONTHS
(UNAUDITED) ENDED ENDED
JANUARY 31, JANUARY 31,
1996 1995
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(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $879 $158
ADD (DEDUCT)-ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS FROM DISPOSITION OF REAL ESTATE 0 1,729
GAIN FROM EXTINGUISHMENT OF DEBT 0 (2,067)
DEPRECIATION AND AMORTIZATION 2,265 2,740
EFFECT OF AVERAGING RENTAL REVENUE (2,536) (3,524)
EQUITY IN NET LOSS OF LCD PARTNERSHIP 256 372
CHANGES IN RECEIVABLES (1,037) (1,778)
CHANGES IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,062 3,316
DIFFERENCE BETWEEN CURRENT INTEREST PAYABLE AND CONTRACTUAL INTEREST 748 1,417
AMORTIZATION OF LOAN FEES 61 134
OTHER (44) (7)
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CASH PROVIDED BY OPERATING ACTIVITIES 2,654 2,490
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CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES AND MATURITIES OF INVESTMENTS AVAILABLE FOR SALE 0 500
PURCHASES OF INVESTMENTS AVAILABLE FOR SALE 0 (1,456)
NET (ACQUISITION) DISPOSITION OF SHORT-TERM INVESTMENTS (1,208) (557)
NET (ACQUISITION) DISPOSITION OF SHORT-TERM INVESTMENTS-RESTRICTED (261) 604
ADDITIONS TO INVESTMENTS IN REAL ESTATE (442) (1,014)
MUSIC AND DANCE THEATER LAND SALE 0 1,250
LEASE COMMISSIONS AND OTHER (52) (83)
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CASH FLOWS (USED IN) INVESTING ACTIVITIES (1,963) (756)
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CASH FLOWS FROM FINANCING ACTIVITIES:
CASH DIVIDENDS DECLARED (174) (174)
PROCEEDS FROM BANK LINE OF CREDIT 0 4,000
PAYMENT OF MORTGAGE LOAN FEES 0 (169)
PRINCIPAL PAYMENTS ON LOANS (68) (4,062)
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CASH FLOWS (USED IN) FINANCING ACTIVITIES (242) (405)
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INCREASE IN CASH AND CASH EQUIVALENTS 449 1,329
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 344 487
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CASH AND CASH EQUIVALENTS, END OF PERIOD $793 $1,816
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THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
THE CHICAGO DOCK AND CANAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1995
1. Summary of Significant Accounting Policies
The financial statements have been prepared in conformity with generally
accepted accounting principles and reporting practices. Significant accounting
policies are described below and reference is made to the Notes to Consolidated
Financial Statements in the Trust's Form 10-K filed with the Securities and
Exchange Commission on August 14, 1995.
The financial statements in this report have not been audited by
independent public accountants. In the opinion of management, all adjustments
necessary for the fair presentation of the financial position and the results of
operations for the interim periods have been made. The results for the three
and nine month periods are not necessarily indicative of the results for the
full year.
2. Subsidiaries and Joint Venture
CDCT Plaza Corporation:
CDCT Plaza Corporation (the "Plaza Corp.") was formed by the Trust as a
wholly owned subsidiary. The Plaza Corp. owns or controls the 400 stall parking
facility under and adjacent to Ogden Plaza. The Plaza Corp. owns the area under
Park Drive, adjacent to Ogden Plaza, has a lessee's interest in a long term
lease from the Chicago Park District in the area under Ogden Plaza, and has a
licensee's interest in the area under Columbus Drive, adjacent to Ogden Plaza,
from the City of Chicago. The license expires February 2002, subject to the
City of Chicago's right to cancel the license for the payment of a fee to the
Plaza Corp. The area subject to the license contains 100 parking stalls and is
separate from the main portion of the parking facility which contains 300
stalls. An independent contractor operates the 400 stall parking facility, with
the Plaza Corp. receiving a varying percentage of gross revenues. The Trust
consolidates the operations of the Plaza Corp. in these financial statements.
OMA Lansing Corporation:
OMA Lansing Corporation (the "Lansing Corp.") was formed by the Trust
during fiscal 1994 as a wholly owned subsidiary. Lansing Corp. owned One
Michigan Avenue, a 148,000 sq. ft. office building located in Lansing, Michigan,
until December 16, 1994 when the Trust agreed to permit the sale by foreclosure
of the building to its lender, Pacific Mutual Life Insurance Company. The Trust
consolidates the operations of the Lansing Corp. in these financial statements.
CDCT Residence Corporation:
CDCT Residence Corporation (the "Residence Corp.") is a wholly owned
subsidiary which was capitalized with land located at the southeast corner of
East North Water and New Streets, (the "High-Rise" site) in Cityfront Center.
The Trust consolidates the operations of the Residence Corp. in these financial
statements.
In August 1989, the Residence Corp. entered into a partnership, LCD
Partnership ("LCD"), with Daniel E. Levin ("Levin"). The Residence Corp.
contributed the High-Rise site which was valued at $6,602,000 and which had an
historic cost of $1,689,000. Levin contributed cash, building plans for the
High-Rise building and a note for $903,000 which matured and was paid in
September 1991. Levin's contribution was valued at $3,301,000. The Residence
Corp. is a two-thirds partner in LCD and Levin is a one-third partner. Major
decisions of LCD, however, require unanimous approval. Accordingly, the
Residence Corp. accounts for its investment in LCD under the equity method.
In August 1989, LCD entered into a joint venture, New Street Joint Venture
("NSJV"), with Northwestern Mutual Life Insurance Company ("Northwestern
Mutual"). LCD contributed the High-Rise site, the plans and other assets
related to the development of the building (excluding the $903,000 note from
Levin). LCD's capital account was credited with $9,000,000. Northwestern
Mutual contributed an equal amount of cash. Northwestern Mutual and LCD are
50/50 partners in NSJV, subject, however, to Northwestern Mutual's priority over
LCD in certain distributions of cash flow and proceeds from sale or refinancing.
LCD accounts for its investment in NSJV under the equity method. The NSJV
agreement provides for Northwestern Mutual to receive a priority return of
operating cash flow and the proceeds from sale or refinancing of the High-Rise.
Cash flow must increase significantly from its current level for LCD to receive
any cash distribution from NSJV after the payment of Northwestern's preferential
return.
Northwestern Mutual also loaned NSJV $36,700,000 on a non-recourse basis.
In addition, the NSJV Agreement calls for LCD and Northwestern Mutual to
contribute, if necessary, their prorata shares of shortfalls in operating and
capital requirements. The High-Rise building opened in July 1991 and contains
480 units.
As of September 30, 1995, total assets and liabilities of NSJV were
$47,188,000 and $39,072,000, respectively. For the nine months ended September
30, 1995, NSJV recorded gross revenues of $5,194,000 and total expenses of
$6,103,000, which resulted in a net loss of $909,000. Included in total
expenses is depreciation and amortization expense, which for the nine months
ended September 30, 1995 equaled $1,297,000. LCD has a fiscal year which ends
on April 30 and NSJV uses the calendar year. Accordingly, LCD records its
proportionate share of NSJV's operating results four months in arrears.
3. Investments in Real Estate
Developed Properties -
One Michigan Avenue:
On December 16, 1994 the Trust permitted the sale by foreclosure of One
Michigan Avenue, an office building in Lansing, Michigan to its lender, Pacific
Mutual Life Insurance Company, in full satisfaction of the note secured by One
Michigan Avenue. The Trust conducted extensive negotiations with the lender
including modifications to the note in March 1994 and again in August 1994 (the
"August modification"), in an effort to restructure the loan. However, the
Trust concluded that the property's reasonably estimated future value was
insufficient to warrant the future capital investment required to satisfy the
terms of the August modification agreement to the loan. The loan was non-
recourse with respect to the Trust. Accordingly, the Trust's financial exposure
was limited to the loss of the building. The Trust recognized a net loss during
the third quarter of fiscal 1995 of $1,265,000 on the transaction; of this,
$3,332,000 was recorded as a loss from disposition of real estate representing
the difference between the carrying value of the property and the fair market
value of the property on the date of the foreclosure. An extraordinary gain
from the extinguishment of indebtedness of $2,067,000 was also recorded during
the third quarter of fiscal 1995, representing the difference between the
principal amount of the note plus accrued interest and the fair market value of
the property on the date of the foreclosure.
Land and Land Improvements Held for Development -
Music and Dance Theater Site:
On December 30, 1994, the Chicago Music and Dance Theater, Inc. (the
"Theater") acquired from the Trust a parcel of land containing approximately
41,000 square feet, located in Cityfront Center which is planned to be the site
of a new 1,500 seat performing arts theater. The Trust received $1,250,000 in
cash shortly after the closing. The contract also obligates the Theater to
construct a pedestrian concourse through the theater site. This concourse is an
obligation under the Planned Development Ordinance affecting the Trust's land at
Cityfront Center and will benefit not only the theater site but also the future
buildings planned for the sites owned by the Trust adjacent to the theater. The
estimated cost of this work is $1,500,000. The Theater is required to commence
construction by September 1, 1996, subject to force majeure delays.
In computing the gain on the sale of $1,603,000, which was recorded during
the third quarter of fiscal 1995, total consideration included the cash received
plus the value of the construction obligation assumed by the Theater which will
benefit the surrounding parcels still owned by the Trust.
The Trust, together with other businesses near the theater site, agreed to
provide the Theater with an annual operating subsidy for up to twenty years.
The
Trust agreed to provide up to $50,000 in the first year of the theater's
operation. This amount increases annually in years 2 through 10 by the increase
in the Consumer Price Index, but no more than 5% over the prior year amount.
During years 11 through 14, the amount is the same as the year 10 amount. The
amount declines during the 15th through 20th years. The amount of the subsidy
may be reduced based on the number of annual public performances at the theater.
The Trust agreed to provide the subsidy in light of the anticipated increase in
parking revenues at its Ogden Plaza parking facility from the theater patrons.
In management's opinion this increase in parking revenues will equal or exceed
the subsidy on an annual basis. The parking facility is adjacent to the theater
site and will be connected to the theater at grade level providing direct access
to the parking facility from the theater.
Land Subject to Hotel Ground Lease -
Sheraton Chicago Hotel & Towers:
During fiscal 1989, the Trust entered into a 50 year ground lease (with
lessee options to extend the term 49 more years) with Tishman Realty Corporation
of Cook County ("Tishman Realty") for approximately 2.3 acres of land in
Cityfront Center in Chicago. Tishman Realty subsequently assigned this lease to
Cityfront Hotel Associates Limited Partnership ("Cityfront Hotel Associates"),
the current lessee. The site is currently improved with a 1,200 room convention
hotel called the Sheraton Chicago Hotel & Towers which opened in March 1992.
The lease provides for minimum annual rental payments which were fixed at
$150,000 through calendar 1994, and for payments which totalled $75,000 for the
six month period January 1, 1995 through June 30, 1995. The payments increased
to $900,000 for the six month period July 1, 1995 through December 31, 1995, and
will equal $2,100,000 for calendar 1996. After 1996, the base rent increases
annually by the increase in the Consumer Price Index, but not less than 5% nor
more than 10% per year. In addition to the base rent, percentage rent became
payable beginning July 1, 1995. Percentage rent equals the amount by which base
rent is exceeded by the product obtained by multiplying gross revenues from
operations by certain applicable percentages ranging from 2% - 5%.
The lessee also has an option to purchase the land. The earliest date on
which the land could be acquired pursuant to the option is August 1, 2003. The
purchase option provides that the land price will be the greater of (i) $40
million at January 1, 1999 escalating thereafter by the increase in the Consumer
Price Index, but not less than 5% nor more than 10% per year or (ii) the highest
annual ground rent payable during the thirty-six month period preceding the
closing date divided by the Applicable Capitalization Rate which ranges from
7.2% - 7.5%. In addition, in the event the option is exercised during the
twelfth operating year beginning April 1, 2003, a supplemental amount of $2.5
million will be added to the purchase price. If the option were exercised at
its earliest date, April 1, 2003, the minimum purchase price which the Trust
would receive is approximately $52 million.
The Trust recognizes as rental revenue the average minimum base rent
payable over the initial 50 year term of the lease. This rent increases from
$150,000 in 1989 to approximately $16 million in 2038. The average rent
calculation also considers the minimum purchase price pursuant to the terms of
the above described purchase option. Under the Trust's method of revenue
recognition, the total carrying value of the land and the related accrued rent
receivable will never exceed the minimum option purchase price. The annual
rental income recognized on the lease is approximately $4,848,000. The cash
rent received during the first nine months of fiscal 1996 equaled $1,100,000.
The lease obligated the Trust to construct certain Phase II infrastructure
prior to the opening of the hotel. These development obligations consisted
primarily of Ogden Plaza and the elevated roadways adjacent to Columbus Drive
and surrounding the plaza. In addition to the infrastructure obligation under
the terms of the lease, the Trust also constructed the parking facility under
Ogden Plaza. Phase II infrastructure was substantially completed in March 1992.
This infrastructure was financed with the proceeds from a loan which has debt
service payments which, for the first eight years, correspond to the base rent
payable on the ground lease.
4. Mortgage Notes Payable
At January 31, 1996, mortgage notes payable consisted of two notes secured
by first mortgages on the rents from and the land under the Kraft Building, and
the rents from and the land under the Sheraton Chicago Hotel & Towers. Both
notes are non-recourse with respect to the Trust.
The principal balance of the Kraft Building note issued in May 1987, was
$5,744,000 at January 31, 1996. It is due in April 2016, bears interest at an
annual rate of 9.5%, payable monthly, and is self-amortizing over its term. The
carrying value of collateral pledged on this note at January 31, 1996 equaled
$15,000.
At January 31, 1996, the principal balance of the note secured by the rents
from and the land under the Sheraton Chicago Hotel & Towers was $22,305,000.
The note is due January 1, 2005. The initial principal amount of the loan was
$14,367,000 and the interest rate is 10.25%. Amounts are payable monthly, but
through December 31, 1998, the debt service currently payable coincides with the
ground rent due under the Sheraton lease. The difference between current
interest payable and the contractual interest is added to principal. Starting
in 1999, debt service will be computed on a 30 year amortization schedule based
on the then current principal balance. The carrying value of collateral pledged
on this note at January 31, 1996 was $33,875,000 and consisted of land, the
depreciated basis in land improvements and accrued but unbilled rent.
On December 16, 1994, the Trust permitted the sale by foreclosure of One
Michigan Avenue, an office building in Lansing, Michigan to its lender, Pacific
Mutual Life Insurance Company, in full satisfaction of the note secured by One
Michigan
Avenue. The One Michigan Avenue note, issued in August 1987, modified in March
1994 (the "March modification") and further modified in August 1994 (the "August
modification") had an interest rate of 10% and a carrying value at December 15,
1994 of $14,590,000.
Due to the significant reduction in cash flow from One Michigan Avenue
after the IBM (the building's largest tenant) lease renewal took effect, the
Trust suspended regular debt service subsequent to the September 1, 1993
payment. Under the terms of the March modification agreement, the lender
received the cash flow from the property from September 1, 1993 to August 31,
1994, in place of regular debt service. Under the terms of the August
modification agreement, cash flow from the property also replaced regular debt
service to the lender from September 1, 1994 to December 15, 1994.
The Trust continued to accrue interest on the loan at the contractual rate
through the effective date of the March modification agreement. Subsequent to
the date of the March modification agreement and up until the date of the August
modification agreement, the Trust accrued interest at a rate which applied a
constant effective interest rate to the carrying amount of the note for each
period from the March modification date to the maturity of the note taking into
account the accrued interest to be forgiven under the March modification
agreement. This constant effective interest rate was approximately 5.5%. After
the August modification agreement was signed and through the date of the
foreclosure sale on December 16, 1994, the Trust accrued interest on the loan at
the original contractual rate of 10%. At December 15, 1994, accrued interest on
this note equaled $1,477,000.
This loan was non-recourse with respect to the Trust. Accordingly, the
Trust's financial exposure was limited to the loss of the property. The Trust
recognized a net loss of $1,265,000 during the third quarter of fiscal 1995 as a
result of the sale by foreclosure.
On December 23, 1994, the Trust entered into a revolving credit agreement
with First Bank, N.A. The agreement has a three year term and provides for a
maximum commitment by the lender of $20,000,000. The agreement is secured by
the Cityfront Place Mid-Rise. Initially, the Trust borrowed $4,000,000 of the
available credit and used the proceeds to retire the $4,000,000 Cityfront Place
Mid-Rise note issued February 25, 1992. During the fourth quarter of fiscal
1995, the Trust repaid the $4,000,000 initially advanced under the credit
facility using available cash and cash equivalents and investments available for
sale. Accordingly, at January 31, 1996, the full amount of the facility is
available. Interest only, based on LIBOR plus 135 basis points, is due monthly
on the amount advanced under the revolving credit agreement. The carrying value
of collateral pledged on this revolving credit agreement at January 31, 1996
equaled $46,600,000.
5. Short-Term Investments - Restricted
As a requirement of the revolving credit agreement entered into by the
Trust on December 23, 1994 with First Bank, N.A., the Trust agreed to make
monthly payments into an escrow account. This account funds the semi-annual
real estate tax payments due on the Cityfront Place Mid-Rise. At January 31,
1996, the balance in this account equaled $391,000.
6. Environmental Remediation Costs
In June 1993, the U.S. Environmental Protection Agency (the "EPA")
conducted preliminary surface tests on a 2.8 acre site currently used as a
surface parking lot (the "Tested Site"). The Tested Site was examined because
thorium, a radioactive element, may have been used on the Tested Site earlier in
the century by a former tenant, in a building which was demolished in the mid
1930's after the expiry of the tenant's lease.
In January 1994, the Trust entered into a consent order with the EPA
regarding preliminary testing to be performed on the Tested Site. Initial on-
site tests were conducted pursuant to that order in May 1994 and laboratory
analysis was completed on the samples in June 1994. The results of the tests
indicate one concentrated area which appears to be contaminated by thorium, and
other scattered areas on the Tested Site with significantly lower levels of
contamination. The most contaminated area is within the footprint of the
building previously occupied by the former tenant. The Trust submitted the
results of the testing to the EPA in September 1994.
The Trust's consultants have prepared cost estimates to remediate the
contaminated areas on the Tested Site which range from $1 million to $5 million,
with $3.5 million representing the most likely amount. That range of costs is
estimated based on the results of surface measurements and the analysis of
samples gathered from nine borings taken on the site. While these tests were
made pursuant to the consent order with the EPA, additional conditions may exist
on the site which would be discovered only upon excavation.
The Trust entered into an agreement on August 11, 1995 (which was expanded
and superseded by an agreement dated January 18, 1996) with Kerr-McGee Chemical
Corporation ("KMCC"), the successor to a former tenant of the Tested Site,
regarding the financial responsibilities of the parties for the remediation of
the Tested Site (the "Reimbursement Agreement"). Under the terms of the
Reimbursement Agreement, KMCC will be responsible for the remediation of the
Tested Site and the Trust has the obligation to reimburse KMCC for 25% of the
cost of remediation, not to exceed a maximum reimbursement obligation of the
Trust of $750,000. Legal counsel has advised the Trust that it may have claims
for coverage for some or all of its share of the remediation costs under its
current or prior
insurance policies.
Currently the Trust, KMCC and the EPA are negotiating an administrative
order regarding remediation of the Tested Site. The Trust anticipates
remediation will occur during calendar 1996. At the latest, the Tested Site
will be remediated when redevelopment occurs. The remediation will most likely
be in the form of excavation and disposal of the soil in specified disposal
areas.
In the fourth quarter of fiscal 1995, the Trust recorded environmental
remediation expense of $1,035,000 based upon the resolution of accounting and
other issues related to environmental remediation costs of property held for
development and the execution of the Reimbursement Agreement with KMCC. This
amount included the Trust's share of testing and legal costs related to the
Tested Site through April 30, 1995, plus $750,000, which is the maximum
reimbursement obligation of the Trust pursuant to the terms of the Reimbursement
Agreement. This amount excluded the amount of the potential claims for some or
all of the Trust's share of the remediation costs under the Trust's current or
prior insurance policies.
7. Subsequent Events
On February 28, 1996, a special committee of the Board of the Trust
retained Lehman Brothers Inc. as financial advisor to assist the Trust in
studying strategic alternatives designed to enhance shareholder value.
ITEM 2
THE CHICAGO DOCK AND CANAL TRUST AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
During the third quarter of fiscal 1996, the Trust leased four surface
parking lots containing 725 stalls to System Parking, Inc. The lots had
previously been leased to North Pier Chicago on a fixed rental basis. The new
lease started January 1, 1996 and provides that the Trust will receive varying
percentages of the gross revenue generated by the lots. System Parking will be
responsible for paying the operating expenses of the lots, but the Trust has the
obligation to pay the real estate taxes. The recent renovation of the nearby
Navy Pier has created significant demand for parking in the area and the Trust
expects a significant increase in net cash flow under the terms of the new lease
compared to the prior lease.
The lease with Ogden Partners North for the first eight townhome lots
commenced January 1, 1996. Ogden Partners is currently marketing the townhomes
on the leased land. The monthly rental to the townhome purchaser will average
$600 per month escalating annually over the 99 year lease term by the increase
in the Consumer Price Index. The lessees will be responsible for the payment of
real estate taxes and other expenses. The full townhome development allows for
an additional 48 units which may be built over the next several years.
As previously reported, the Trust previously signed a conditional letter of
intent with Senior Lifestyle Corporation ("SLS") for the development of a 225
unit senior housing facility on land which the Trust would lease to SLS. SLS
has informed the Trust that, to date, they have been unable to arrange the
necessary financing for the project under the terms of the letter of intent.
The Trust and SLS are discussing alternative transaction structures which could
attract the required financing, but no definitive modification to the current
letter of intent has been agreed upon. Unless extended by mutual agreement of
the parties, the current letter of intent will expire on March 31, 1996.
On February 28, 1996, the Trust announced that a special committee of the
Board had retained Lehman Brothers Inc. as financial advisor to assist the Trust
in studying strategic alternatives designed to enhance shareholder value.
The dividend payable March 1, 1996 was increased to $.04 per share compared
to the prior quarterly dividend of $.01 per share.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 31, 1996 VERSUS
NINE MONTHS ENDED JANUARY 31, 1995
Revenues:
Revenue from rental property decreased for the nine months ended January
31, 1996 compared to the same period in the prior year primarily due to the
disposition of One Michigan Avenue in December 1994. The Trust recorded no
revenue from One Michigan Avenue in the current nine month period compared to
$1,477,000 recorded in the first nine months of the prior year. Revenue
increased in the current nine month period by $503,000 due to the termination
effective July 31, 1995 by the Trust of the master lease with respect to the
surface parking lot known as parcel P-9. Revenue increased an additional
$275,000 in the current nine month period due to the new lease with System
Parking, Inc., effective January 1, 1996 for four surface parking lots,
including the lot on parcel P-9. Revenue from the Mid-Rise also increased
during the current period by $381,000 due to a combination of higher rates and
higher occupancy compared to the same nine month period in the prior year.
Revenue from Waterplace Park, however, decreased by $318,000 due primarily to
the expiration of the lease for Tri-County in March 1995.
Due to the termination of the lease with respect to parcel P-9 effective
July 31, 1995 and due to the terms of the new lease with System Parking, Inc.,
effective January 1, 1996 for four surface parking lots, the Trust became liable
for real estate taxes on these parcels. As a result, real estate taxes payable
by lessees decreased by $252,000 compared to the same period in the prior year.
Real estate taxes payable by lessees also reflects a decrease of $166,000 in the
estimated tax assessment for the period on the Sheraton Chicago Hotel & Towers.
Real estate taxes payable by lessees are also reflected as an expense, and
therefore, do not affect net income.
Equity in Net Loss of LCD Partnership reflects the Trust's effective one-
third share of the operations of New Street Joint Venture, the entity which owns
the Cityfront Place High-Rise. The loss for the current nine month period,
which ended January 31, 1996, reflects the building's operations from January 1,
1995 through September 30, 1995, the first nine months of New Street Joint
Venture's fiscal year. The current period loss had no impact on Trust cash
flows since New Street Joint Venture had positive income before depreciation and
amortization expense and because of the cash flow priority of LCD's partner in
New Street Joint Venture.
Expenses:
The disposition of One Michigan Avenue in December 1994, is the most
significant factor in the reductions in real estate taxes, property operating
expenses,
depreciation and amortization expense and interest expense for the nine months
ended January 31, 1996 compared to the same period in the prior year.
As a result of the termination of the lease with respect to parcel P-9
effective July 31, 1995, real estate taxes and property operating expenses
increased by a combined $279,000 during the current period.
General and administrative expense increased for the current period
primarily as a result of hiring FPL Associates to assist the Trust in its annual
long range planning process and due to higher legal expense. General and
administrative expense also reflects higher trustee meeting expense due to an
increase in the number of meetings and an increase in the cost of printing and
distributing shareholder reports.
NET LOSS FROM DISPOSITION OF REAL ESTATE AND
GAIN FROM EXTINGUISHMENT OF DEBT:
The Trust recognized a gain of $1,603,000 from the sale of a parcel of land
to the Chicago Music and Dance Theater, Inc. during the third quarter of fiscal
1995. Total consideration from the sale equaled $2,638,000 which consisted of
cash received of $1,250,000 plus the value of a construction obligation of
$1,388,000 assumed by the Theater which will benefit the surrounding parcels
still owned by the Trust. This construction obligation is a pedestrian
concourse through the theater site which was required under the Planned
Development Ordinance affecting the Trust's land at Cityfront Center.
During the third quarter of fiscal 1995, the Trust also recognized a net
loss of $1,265,000 as a result of the sale by foreclosure of One Michigan
Avenue. The net loss consisted of a loss from disposition of real estate of
$3,332,000 and an extraordinary gain from the extinguishment of debt of
$2,067,000. The loss from real estate represents the difference between the
carrying value of the property and the estimated fair market value of the
property on the date of foreclosure. The extraordinary gain represents the
difference between the principal amount of the note plus accrued interest and
the estimated fair market value of the property on the date of the foreclosure.
THREE MONTHS ENDED JANUARY 31, 1996 VERSUS
THREE MONTHS ENDED JANUARY 31, 1995
Revenues:
The increase in revenue from rental property for the three months ended
January 31, 1996 compared to the same period in the prior year was due to
several factors. The new lease with System Parking, Inc., effective January 1,
1996 for four surface parking lots, increased revenue by $275,000. Revenue
increased an additional $128,000 due to the termination effective July 31, 1995
by the Trust of the
master lease with respect to the surface parking lot known as parcel P-9.
Revenue from the Mid-Rise also increased during the current quarter by $93,000
due to a combination of higher rates and higher occupancy compared to the same
quarter in the prior year. Due to its December 1994 disposition, the Trust
recorded no revenue from One Michigan Avenue in the current quarter compared to
$384,000 recorded in the third quarter of the prior year. Revenue from
Waterplace Park also decreased by $77,000 due primarily to the expiration of the
lease for Tri-County in March 1995.
Due to the termination of the lease with respect to parcel P-9 effective
July 31, 1995 and due to the terms of the new lease with System Parking, Inc.,
effective January 1, 1996 for four surface parking lots, the Trust became liable
for real estate taxes on these parcels. As a result, real estate taxes payable
by lessees decreased by $162,000. Real estate taxes payable by lessees also
reflects a decrease of $56,000 in the estimated tax assessment for the quarter
on the Sheraton Chicago Hotel & Towers. Real estate taxes payable by lessees
are also reflected as an expense, and therefore, do not affect net income.
Equity in Net Loss of LCD Partnership reflects the Trust's effective one-
third share of the operations of New Street Joint Venture, the entity which owns
the Cityfront Place High-Rise. The loss during the Trust's third quarter of
fiscal 1996, which ended January 31, 1996, reflects the building's operations
from July 1, 1995 through September 30, 1995, the third quarter of New Street
Joint Venture's fiscal year. The current quarter loss had no impact on Trust
cash flows since New Street Joint Venture had positive income before
depreciation and amortization expense and because of the cash flow priority of
LCD's partner in New Street Joint Venture.
EXPENSES:
The disposition of One Michigan Avenue in December 1994 is the most
significant factor in the reductions in real estate taxes, depreciation and
amortization expense and interest expense for the three months ended January 31,
1996 compared to the same period in the prior year.
As a result of the termination of the lease with respect to parcel P-9
effective July 31, 1995, real estate taxes and property operating expenses
increased by a combined $109,000 during the current period.
General and administrative expense increased for the current quarter
primarily as a result of hiring FPL Associates to assist the Trust in its annual
long range planning process.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS:
OPERATING
Cash flows from operating activities increased for the first nine months of
fiscal 1996 compared to the same period in the prior year due primarily to an
increase in cash flows from parking operations due to the combination of the
termination of the master lease with respect to the surface parking lot known as
parcel P-9 effective July 31, 1995 and the commencement of the new lease with
System Parking, Inc., effective January 1, 1996 for four surface parking lots.
INVESTING
Cash flows used in investing activities increased during the nine months
ended January 31, 1996 primarily due to the receipt of $1,250,000 from the sale
of the Music and Dance Theater site during the prior year. Cash flows used in
investing activities also increased as a result of a net combined increase in
the acquisition of restricted and unrestricted short-term investments. This
increase was partially offset by a reduction in investment in tenant
improvements, primarily in One Michigan Avenue, which had been recorded in the
same period in the prior year.
FINANCING
Cash flows used in financing activities during the current nine month
period decreased compared to the same period in fiscal 1995 due to the payment
of mortgage loan fees in connection with the revolving credit agreement entered
into with First Bank, N.A. during December 1994.
FUNDS FROM OPERATIONS
The Board of Governors of the National Association of Real Estate
Investment Trusts in 1991 adopted a definition of "Funds From Operations" as
follows:
Funds from Operations means net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and
joint ventures. Adjustments for unconsolidated partnerships and joint
ventures will be calculated to reflect funds from operations on the same
basis.
Funds from Operations equaled $3,539,000 for the nine months ended January
31, 1996 compared to $2,985,000 for the same period in the prior fiscal year.
This increase of $554,000 in Funds from Operations is primarily due to an
increase in
parking revenues due to the combination of the termination of the master lease
with respect to the surface parking lot known as parcel P-9 effective July 31,
1995 and the commencement of the new lease with System Parking, Inc., effective
January 1, 1996 for four surface parking lots, including the lot on parcel P-9.
In March 1995, the Board of Governors clarified the preceding definition
with respect to the treatment of certain items, although the clarification did
not affect the Trust's reporting of such funds. The preceding definition of
Funds from Operations includes certain material non-cash items which are
reported in income and expense of the Trust. Please refer to the Consolidated
Statements of Cash Flows in the financial statements for the computation of cash
flows from operating, investing and financing activities.
The Trust has historically used non-recourse debt secured by individual
properties as the primary source of additional capital, when needed, to fund
acquisitions or development. It has also acquired income producing properties
in tax-deferred exchanges in which little or no debt was required. The Trust
currently has four income producing properties with no debt - Waterplace Park,
Lincoln Garden, the Cityfront Place Mid-Rise and the Ogden Plaza parking
facility. The Trust has a three year $20,000,000 revolving credit agreement
with First Bank, N.A. secured by the Mid-Rise apartment building which expires
in December 1997. At January 31, 1996, the full amount of the facility is
available. At January 31, 1996, total interest bearing debt of the Trust
equaled $28,049,000, all of which was fixed rate debt.
The Trust has occasionally sold properties. The most recent sale occurred
during the third quarter of fiscal 1995 when the Trust sold a parcel containing
approximately 41,000 square feet to the Chicago Music and Dance Theater, Inc.
Prior to this, the Trust sold the land under the Brick Venture apartment
building adjacent to North Pier at Cityfront Center in fiscal 1989.
In January 1994, the Trust entered into a consent order with the EPA
regarding preliminary testing to be performed on a 2.8 acre site in Cityfront
Center currently used as a parking lot (the "Tested Site"). The Trust's
consultants have prepared cost estimates to remediate the contaminated areas on
the Tested Site which range from $1 million to $5 million, with $3.5 million
representing the most likely amount.
The Trust entered into an agreement on August 11, 1995 (which was expanded
and superseded by an agreement dated January 18, 1996) with Kerr-McGee Chemical
Corporation ("KMCC"), the successor to a former tenant of the Tested Site,
regarding the financial responsibilities of the parties for the remediation of
the Tested Site (the "Reimbursement Agreement"). Under the terms of the
Reimbursement Agreement, KMCC will be responsible for the remediation of the
Tested Site and the Trust has the obligation to reimburse KMCC for 25% of the
cost of remediation, not to exceed a maximum reimbursement obligation of the
Trust of $750,000.
Currently the Trust, KMCC and the EPA are negotiating an administrative
order regarding remediation of the Tested Site. The Trust anticipates
remediation will occur during calendar 1996. At the latest, the Tested Site
will be remediated when redevelopment occurs. The Trust will consider using its
current cash, investments available for sale or its current credit facility, to
fund its obligations under the Reimbursement Agreement with KMCC. The Trust may
have claims for coverage for some or all of its share of the remediation costs
under its current or prior insurance policies.
In order to fully develop the land owned by the Trust in Chicago,
additional infrastructure expenditures will be required. These improvements are
necessary to fully redevelop the property in accordance with the Planned
Development Ordinance
approved by the Chicago City Council on November 6, 1985.
The Trust completed Phase I infrastructure in fiscal 1988 using the
proceeds from borrowings secured by the Kraft Building and One Michigan Avenue.
Total Phase I expenditures amounted to approximately $10 million. The Trust
completed Phase II infrastructure in fiscal 1992 using the proceeds from a
borrowing secured by the rents from and land under the Sheraton Chicago Hotel &
Towers ground lease.
Phase III infrastructure consists primarily of the River Esplanade and
River Drive east of McClurg Court, Du Sable Park (a 3 acre park east of Lake
Shore Drive), the slip promenade on the south bank of the Ogden Slip and
upgrading of the remainder of East North Water Street. The total current cost
of the improvements is estimated to be approximately $12 million. Under the
terms of the lease with Ogden Partners North, Inc., this lessee would construct
a portion of the Phase III infrastructure at its expense. The Trust is
obligated to contribute $600,000 for improvements to be made in Du Sable Park,
which are expected to be completed during calendar 1996. The remainder of Phase
III will be constructed as needed to support additional development in the area.
However, certain improvements are required to be completed no later than the
completion of 2,500 units of residential development on the east portion of
Cityfront Center. It is the intention of the Trust to finance future
infrastructure with cash on hand, its current credit facility, general corporate
indebtedness, borrowings secured by its income producing properties and ground
leases, asset sales or some combination of these sources.
The New Street Joint Venture Agreement obligates LCD and Northwestern
Mutual to contribute, if necessary, their prorata shares of funds related to the
operation of the High-Rise building. As of January 31, 1996, LCD had funded
$335,000 as its share of additional capital contributions, all of which was
contributed prior to fiscal 1994. LCD currently holds approximately $865,000 in
short term investments. The Trust's two-thirds share of these short term
investments is not reflected on the Trust's balance sheet and is in addition to
the Trust's cash and investments. The New Street Joint Venture agreement
provides for Northwestern Mutual to receive a priority return of operating cash
flow and the proceeds from sale or refinancing of the High-Rise. Cash flow must
increase significantly from its current level for LCD to receive any cash
distributions from New Street Joint Venture after the payment of Northwestern's
preferential return.
On December 16, 1994 the Trust agreed to permit the sale by foreclosure of
One Michigan Avenue, an office building in Lansing, Michigan to its lender,
Pacific Mutual Life Insurance Company, in full satisfaction of the note secured
by One Michigan Avenue. The One Michigan Avenue note, issued in August 1987,
modified in March 1994, and further modified in August 1994, had an interest
rate of 10% and carrying value at December 15, 1994 of $14,590,000. The
disposition of the property will not have a significant impact on the future net
cash flow of the Trust. Net cash flow from the property was not significant in
fiscal 1995.
At Waterplace Park in Indianapolis, the lease for the largest tenant, Tri-
County Mental Health, expired at the end of March 1995. Tri-County had occupied
29,000 square feet, or 28% of the total complex, prior to vacating. Recently a
current tenant signed a lease to occupy, in April 1996, 12,500 square feet of
the space previously occupied by Tri-County. This tenant will vacate 7,500
square feet it currently occupies, resulting in net increase in occupancy of
5,000 square feet. In addition, a potential new tenant recently signed a letter
of intent to lease another 12,500 square feet effective in May 1996. Should
both deals occur, occupancy at Waterplace Park would climb to 83%.
Starting July 1, 1995, the base rent payable to the Trust from its lease
with Cityfront Hotel Associates Limited Partnership for the Sheraton Chicago
Hotel & Towers increased to an annual rate of $1.8 million from the prior annual
amount of $150,000. While all of this increase will be paid as additional debt
service on the loan which financed the infrastructure improvements associated
with the hotel, it is the starting point for future increases in minimum base
rent and minimum rent will exceed the debt service beginning in 1999.
Also starting July 1, 1995, the percentage rent provisions of the hotel
ground lease became effective. The Trust received $226,000 from the hotel as a
deposit against percentage rent from July 1, 1995 through December 31, 1995 for
the operating year ending March 31, 1996. This amount represents a deposit and
has not been earned. The lease calls for quarterly deposits based on quarterly
revenues but the actual calculation of percentage rent is not made until after
the operating year end based on hotel operations for the entire operating year.
Management considers that the Trust's liquidity at January 31, 1996 is
adequate to meet its operating needs and commitments.
PART II
Item 6(a) - Exhibits -
3.2 Bylaws of The Chicago Dock and Canal Trust adopted February 13, 1996
are filed herewith.
Item 6(b) - Reports on Form 8-K.
The Trust filed a Form 8-K on February 28, 1996 reporting that a special
committee of its Board had hired Lehman Brothers Inc. as financial advisor to
assist the Trust in studying strategic alternatives to enhance shareholder
value.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHICAGO DOCK AND CANAL TRUST
/S/ DAVID R. TINKHAM
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David R. Tinkham, Vice President
and Chief Accounting Officer
March 14, 1996